Here’s how the highly partisan, polarized view of who’s to blame for the financial crisis breaks out:
Liberals blame Bush era deregulation which allowed greedy head bankers to run amok.
Conservatives blame poor people, who encouraged Democratic politicians who cater to them to force banks to lower their lending standards. And of course, there’s ACORN.
But those clashing views break down when you look into the history of the fight to repeal the landmark Depression-era Glass-Steagal Act.
That law, repealed 10 years ago this week, set the rules for how banking worked for more than 60 years. It kept federally guaranteed banks separated from the riskier business of buying and selling securities.
The repeal was a joint effort by both parties, co-sponsored by Republican Sen. Phil Gramm, passed by a Republican-led Congress and signed by Democratic president, Bill Clinton. In that bitter political era, the two parties joined together to grant the financial industry’s greatest wish.
They did it after a tenacious and costly 20-year lobbying effort by the financial industry that had succeeded in chipping away at the law little by little. In the 1997-98 election cycle alone, the financial, insurance and real estate sector spent more than $200 million in lobbying and $150 million in campaign contributions.
Glass-Steagal was undone in a law branded as “The Financial Modernization Act”.
Hard to be against modernization, right?
But there were a few who fought it and warned of dire consequences, as Huffington Post pointed out. When we go back and listen to them now, their words are chilling: “I want to sound a warning call about this legislation, said Sen. Byron Dorgan, a Democrat from North Dakota. “I think this legislation is just fundamentally terrible.”
Dorgan was one of eight senators who opposed the repeal, seven Democrats and one Republican, Richard Shelby of Alabama. Another opponent, the late Sen. Paul Wellstone of Minnesota, warned Congress “was about to repeal the economic stabilizer without putting any comparable safeguard in place.”
Fighting for repeal were the banking lobby as well as key Democrats, such as Sen. Christopher Dodd and Sen. Chuck Schumer, who 10 years later have tried to reposition themselves as advocates of tough reform.
Also fighting for repeal of Glass-Steagall were key members of the Clinton administration, such as Treasury Secretary Robert Rubin and Lawrence Summers, then an assistant secretary at Treasury and later Treasury secretary, now a key economic adviser to President Obama. Also weighing in for repeal was Alan Greenspan, then head of the Federal Reserve, who was then a strong advocate of bankers policing their own conduct.
The power and influence of these three, Rubin, Summers and Greenspan, is hard to underestimate. Months before Glass-Steagal fell, they had been anointed “The Committee to Save the World” on the cover of Time magazine for their prowess in managing the financial system.
Rubin became chairman of Citibank, which was a main beneficiary of the repeal of Glass-Steagal. Summers became president of Harvard University before joining the Obama administration.
Those who dared challenge the ideology that the financial industry should operate without government interference, like Byron Dorgan, remained lonely heretics.
Even Dorgan hasn’t always landed on the side of Main Street. Earlier this year, he voted against a key provision of President Obama’s strategy to stem foreclosures: judicial cram-downs, which would have allowed judges to modify mortgages in bankruptcy court. The proposal faced heavy opposition from bankers. Without the cram-downs, Obama’s strategy has consisted of all carrots for the banks with no stick.
Today the argument continues over whether the repeal of Glass-Steagal played a major role in the financial crisis. Some, mainly conservatives, argue that repeal had no impact on investment banks, which were the primary cause of the meltdown, and in fact facilitated banks’ ability to absorb investment banks during the crisis.
But critics of repeal insist that commercial banks were in the thick of buying and selling the toxic securities at the heart of the crisis – mortgage-backed securities and credit-default swaps.
Meanwhile, Citibank, the poster child for the benefits of Glass-Steagal repeal, has survived only as a ward of the state, as did AIG. Without “modernization,” that insurance company would not have been able to sell securities.
When Glass-Steagal was repealed, Dorgan predicted that Congress “would look back in 10 years and say we should not have done this but we did because we forgot the lessons of the past, and that which is true in the 1930s is true in 2010.” As the New York Times reported, Dorgan continued: “I wasn’t around during the1930s or the debate over Glass-Steagal. But I was here in the 1980s when it was decided to allow the expansion of the savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
Even after the financial crisis, the prospect of enacting real reform remains daunting. Those in authority who would really challenge the power of the financial industry remain lonely voices.
As we consider a new round of regulation, amid a fresh wave of fierce lobbying from the banking industry and earnest promises from Democrats and Republicans that they have our best interests at heart, Dorgan’s words from 10 years ago continue to haunt the debate.